Understanding Objections to Discharge in Bankruptcy

When a debtor files for bankruptcy, many debts will be discharged when the bankruptcy is finalized. However, during the bankruptcy process, a creditor can file an objection to discharge of a specific debt. Filing an objection constitutes an adversary proceeding within the bankruptcy case.

Section 523 Objections to Discharge

Section 523 of the U.S. Bankruptcy Code includes a detailed list of debts that are non-dischargeable in a bankruptcy case. If a creditor holds this type of debt, it may be necessary to file an objection to discharge to establish the facts that make the debt non-dischargeable. Objections to specific debts are most often filed under one of several subsections of Section 523.

Many objections to discharge are filed under Section 523(a)(2)(A) on the basis that the debtor obtained the debt by "false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition.” A creditor who files an objection to discharge on this basis has the burden of proving fraud or misrepresentation, except in two instances where debts are presumed to be non-dischargeable:

• Consumer debt in excess of $675 for luxury goods or services purchased within 90 days preceding filing of the bankruptcy petition; or
• Cash advances exceeding a total of more than $950 obtained within 70 days preceding filing of the petition.

Objections to discharge also may be filed under Section 523(a)(2)(B), if the debtor provided a materially false written statement about the debtor's or an insider's financial condition. In addition, under Section 523(a)(4), an objection to discharge may be filed if the debtor committed fraud or misappropriated funds while acting in a fiduciary capacity. Objections under this section include circumstances constituting embezzlement and larceny. Finally, an objection to discharge may be filed under Section 523(a)(6), if the debtor caused willful or malicious injury to another entity or person (including property).

In addition to these situations, in which a creditor or the trustee may file an objection to discharge of a debt based on specific intentional wrongdoing of the debtor, there are situations when a creditor (or the debtor) will file a request asking the bankruptcy court to determine whether a specific debt falls within the types of debts declared to be non-dischargeable under Section 523(a). This type of request also is an adversary proceeding in the bankruptcy case.

When a bankruptcy court reviews a debt to determine whether it falls under one of the exceptions to dischargeability, the court will narrowly construe the exceptions and require that the debt fully satisfies the statutory requirements. Examples of situations in which bankruptcy courts have ruled in this type of case include:

• A determination that incarceration costs under the Minnesota "pay to stay" statute do not meet the Bankruptcy Code requirements for non-dischargeability under Section 523(a)(7);
• A holding that legal malpractice claims may be non-dischargeable under Section 523(a)(4) for misappropriation of funds while acting in a fiduciary capacity, if the attorney's actions deviated grossly from the rules of professional conduct;
• A court opinion stating that family court obligations for payment of attorney's fees and obligations to a third-party law firm may be non-dischargeable under Sections 523(a)(5) and (a)(15);
• A decision that a commercial loan from a for-profit creditor to pay for bar exam studies did not qualify as a non-dischargeable "educational benefit" under Section 523(a)(8)(A)(ii).

In addition to objections to discharge of a specific debt, the trustee or a creditor can file an objection to the entire discharge under Section 727 of the Bankruptcy Code.

Process for Making an Objection to Discharge

Under Rule 4004 of the Federal Rules of Bankruptcy Procedure, there are time limits on filing an objection to discharge. The objection to discharge must be filed in a Chapter 7 or Chapter 13 bankruptcy case within 60 days after the first date set for the meeting of creditors. In contrast, a creditor or the debtor may file a complaint asking the bankruptcy court to determine dischargeability of a debt under Rule 4007 at any time, except in limited circumstances.

Generally, the trustee or a creditor can file a motion to extend the time for filing an objection to discharge only before a discharge is granted and then only if:

• The objection is based on facts unknown in time to file a timely objection; and
• The facts would provide a basis for revocation under Section 727(d) of the Bankruptcy Code if learned after discharge.

An objection to discharge constitutes an adversary proceeding within the bankruptcy case, sometimes also referred to as bankruptcy litigation. It is an entirely separate court action, involving investigation and discovery and eventually a hearing before the bankruptcy court.

Under Rule 4005 of the Federal Rules of Bankruptcy Procedure, the creditor who files an objection to discharge has the burden of proving the basis for the objection. That evidence must be presented to the court during the hearing through witnesses and introduction of documentary evidence. At the conclusion of the hearing, the bankruptcy court renders a decision on whether to grant or deny the creditor's objection to discharge.

The nature of an objection to discharge as separate litigation makes it imperative for the parties to be represented by an attorney experienced and knowledgeable in bankruptcy adversary proceedings. A bankruptcy litigation attorney representing a creditor will know how to investigate the case and gather evidence to present the case in support of a objection. The debtor also should be represented by an attorney knowledgeable in adversary proceedings who can defend against the objection.

In addition to addressing the evidentiary and hearing aspects of adversary proceeding, an experienced bankruptcy litigation attorney also has keen negotiation skills. If the circumstances present an opportunity for resolving the issue through settlement, the attorney will be able to negotiate an appropriate settlement.

Talk With an Experienced Twin Cities Bankruptcy Litigation Attorney About Objections to Discharge

In my practice at the Dave Burns Law Office, I represent both creditors and debtors in adversary proceedings in the United States Bankruptcy Courts in Minneapolis and St. Paul. If you are a creditor or debtor requiring assistance with an objection to discharge in a bankruptcy case, I welcome you to contact me at (612) 677-8351 or by emailing dave@daveburnslaw.com. I work with clients throughout the Twin Cities metro area and am available to meet with clients in both Minneapolis and St. Paul.